A short sale is the process of selling your home for less than you owe the bank.  There is nothing on the books that really define that a Short Sale is something that is part of the industry.  It's simply a solution that has become commonplace in a market where most of the homes out there are worth less than what is owed on them.

The simple answer is everyone qualifies. If you own a home that is worth less than you owe, you qualify.  When it comes to your home, you are in control of whether or not the bank receives their monthly payment.  While you may be morally obligated to pay your debts, the bank is concerned about one thing, money.  If you left your home and never paid the bank another penny, they would eventually take it back from you, and could possibly pursue you legally for the amount you agreed to pay the difference of what the bank sells the house for and what you owe them.  The other option the bank has when you walk away from the home is to allow you to sell it before the banks has to do it themselves.  Whether or not the bank will agree to let you out of the house for less than you owe may be another story.

Most likely, a short sale is going to hurt your credit, but not as much as missed payments do.  How much will it hurt?  There's really no formula to determine how much your credit rating will be affected.  It will certainly not hurt as much as a foreclosure will.  When considering purchasing a home in the future, you'll be glad you worked through a short sale rather than walking away completely.

There is no guarantee that selling your house short of what you owe won't require you to come to the table with a few bucks, but it's common that banks will negotiate a solution with you that won't require you to any out of pocket expense.  In some cases, I've seen previous owners required to take out a note for the difference of what they sell the home for and what is owed to be paid over time.  In other cases, owners have been able to walk away, saving themselves from a foreclosure, without paying a cent.

Each case is different.

In a Short Sale, on paper, the seller pays the brokerage fees, but in actuality, the 1st lien-holder makes an allowance for a portion of the buyer's new funding to filter through the transaction in order to cover the listing brokerage's fees.  For instance, if a home were to be sold for $100,000, the 1st lien-holder would accept this as a payoff less closing costs of which a portion are the listing broker's fees.  So, the mortgage company is "backing away" from the full price to allow fees to be paid.